GAO confirms outsourcing in fed human services programs, problems in data collection

By Lee Russ

Friday, April 14, 2006 at 06:05 PM

Although you don't hear a lot about it on t.v., and virtually nothing on the right's "squawk radio" territory, the Government Accountability Office (GAO) has been fairly active in investigating the offshoring phenomenon.

One study released just last month-- GAO-06-342--examined four federally-funded state-administered programs (Child Support Enforcement, Food Stamp, Temporary Assistance for Needy Families (TANF), and Unemployment Insurance) and two federally-administered programs that provide student financial aid (Pell Grants and Federal Family Education Loan (FFEL)).  GAO sought to determine:

(1) the occurrence and nature of offshoring
(2) the benefits state agencies have achieved through offshoring and problems they have encountered, and
(3) the actions, if any, states and the federal government have taken to limit offshoring and why.

The report's summary concludes that (emphasis added):

Some work is performed offshore in the majority of states for the four state-administered programs we reviewed, but no work is performed offshore for the two federally-administered student aid programs. Offshoring occurred in one or more programs in 43 of 50 states and the District of Columbia, most frequently in the Food Stamp and TANF programs. However, expenditures for services performed offshore in the four state-administered programs appear to be relatively small. The services states most frequently reported as being performed offshore in the Food Stamp and TANF programs were functions related to customer service, such as call centers, and in the Unemployment Insurance and Child Support Enforcement programs functions were related to software development. India was the most prevalent offshore location, followed by Mexico. We did not find any occurrences of offshoring in the Pell Grant and FFEL programs and the Department of Education's U.S. residency requirement for contractors performing high-risk work has the effect of limiting offshoring.
...
While numerous actions have been proposed at the state and federal levels to limit offshoring by government agencies, few restrictions exist with respect to the six programs we reviewed. Two states--New Jersey and Arizona--have prohibited offshoring in state contracts. Some states have also taken other actions, such as requiring state agencies to disclose when state-contracted work is performed offshore or to report on the implications of offshoring. The federal government does not have regulations specifically related to the offshoring of services in the six programs we reviewed.

Your government, working for you by having India work instead of you.

An earlier study--GAO-06-116 dated October of 2005, examined a conflict in the statistics on U.S. offshoring of business, professional, and technical (BPT) services to India. Specifically, they wanted to know why "U.S. data indicate that U.S. firms import a small fraction of what India reports as exports to the United States in this category."

The magnitude of the discrepancy was alarming, which is undoubtedly what drew GAO's attention:

For 2002, the United States reported $240 million in unaffiliated imports of BPT services from India, while India reported about $6.5 billion in affiliated and unaffiliated exports in similar services categories.3 For 2003, the United States reported $420 million in unaffiliated imports of BPT services from
India, while India reported approximately $8.7 billion in affiliated and unaffiliated exports of similar services to the United States.

So what did GAO find to explain this?

1. India counts the earnings of temporary Indian workers residing in the United States as exports to the United States, but the US only includes temporary foreign workers who have been in the United States less than 1 year and who are not on the payrolls of firms in the United States. Indian officials estimate that this factor may account for 40 to 50 percent of the difference between U.S. and Indian data.

2. India defines services more broadly than does the US. For  example, Indian data on trade in services include packaged software and software embedded on computer hardware, which the United States classifies as trade in goods. An Indian official estimated that this factor accounts for approximately 10 to 15 percent of Indian exports.

3. India treats sales to US-owned firms located outside of the United States as exports to the United States, but the United States does not count these as imports.

4. For trade between US firms and their foreign affiliates, BEA does not report BPT data by country due to its concerns about the quality of responses it receives from firms when they allocate their affiliated imports to detailed types of services. US import data on BPT services from India are thus available for unaffiliated parties only, while Indian data include both affiliated and unaffiliated trade but do not separate them.

5. It appeared that the US did not survey some US firms that Indian data indicate were importers of BPT services from India.

It's all stated very neutrally, but the net effect is that, again, official data from the government is misstating an important statistic, and the direction of the misstatement is in the US government's favor: understating offshoring of services, which obviously minimizes public outcry. Kind of reminds you of the way they measure unemployment and the rate of inflation, doesn't it?

I don't doubt for a minute that the Indian data may overstate US offshoring for the same reason--it makes India look good.  But that doesn't cancel out our understatement.

Which brings me to a third GAO report--GAO-06-5 dated November, 2005, which produced "An Overview of the Issues" involved in U.S. offshoring of services.  Although not easily summarizable, and a hefty read as well, the report examines the differing views on whether offshoring is likely to be a boon or a detriment to the US economy.  Needless to say, the "views" are "differing" indeed.  The GAO doesn't attempt to decide which view is correct, but the report does set out both sides, at least acknowledging what I think is a growing trend to see acknowledge the negatives, and, to some degree, reviews evidence to support the conflicting views.

Taken together, the three GAO reports serve as a pretty good introduction to US offshoring.  The fact that all three are quite recent is also a plus.